It’s Time for Greed, Not Fear

03/03/2008 12:00 am EST

Focus: MARKETS

David Fried

Editor, The Buyback Letter

David Fried, editor of David Fried’s Buyback Letter, says there are many reasons to be bullish—and all the bearishness around is one of them.

“Be fearful when everyone else is greedy and greedy when everyone else is fearful.”—Warren Buffett

The above quote is both timeless and timely right now. I can hear the groans as you read: why, you may ask, with all the bad news, should I be greedy and optimistic?

[True,] the credit crunch sparked by the subprime mortgage fiasco continues, as does a downward pressure in housing. However, what looked like a death spiral last month is now leveling out. Loans are being made and the housing market is stabilizing. And let’s not forget that all the dire predictions of [what would happen with] $100-a-barrel oil have not come to pass.

Let’s look at some other facts:

1. Historically, the Dow Jones Industrial Average hits a low in midterm election years and averages a 50% increase from that point to an election-year high. The Dow’s low in 2006 was 10,660. A 50% move from there would indicate a Dow of around 16,000!

According to Ned Davis, the Dow has gained an average of 18% over one year when the Federal Reserve cuts rates three times in a row. The Dow was at 13,242 in December after three rate cuts. That would indicate a Dow of about 15,625 by the end of 2008!

2. On average, after a peak in interest rates, the Fed cuts about 400 basis points over a 20-month period. We are only about halfway to that average. More cuts are entirely possible.

3. Insider buying has outpaced insider selling in recent weeks. Insiders are generally net sellers of stock, since they often receive stock as part of their compensation. Insiders also generally have a longer time frame than the average investor [and they] tend to be value investors. They know better than most when their companies’ shares are cheap.

Despite these facts, investors feel bad.

1. [In early January bearishness among members of the American Association of Individual Investors] was at a very high level—higher, in fact, than at the end of the dot-com bust. The stock market has tended to perform well following these bearish readings.

2. [There is an] unprecedented level of fear among “Dogs of the Dow” investors. This is also a reading that accompanies market lows.

3. Another level of fear is the VIX. It measures volatility based on index option prices. High levels of fear as measured by the VIX were reached in late January. This usually occurs toward the end of a correction.

4. According to Investors Intelligence, after four months, sellers into buying climaxes and buyers into selling climaxes are right about 80% of the time. For the week of January 21st, selling climaxes registered 1,385 stocks, a huge number!

[Finally,] five of our seven indicators are positive (inflation, dividend yield, yield curve, money supply, and the Fed) and two are neutral (valuation and sentiment). None of our indicators is negative, and that has never happened before!

The market is all about fear and greed. To us, it looks like time to be greedy and not fearful.

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